DeFi has gained significant momentum over the years, mainly because of its ability to earn a substantial amount of interest on DAI (the popular USD pegged stablecoin) and other types of cryptocurrency.
Getting started with DeFi
Below is a step-by-step guide on how to get started with DeFi and learn the basics.
Step 1 – Set up your wallet
Firstly, you will require a cryptocurrency wallet installed on your browser, one that ideally supports Ethereum and can also connect to various DeFi protocols.
MetaMask is the most commonly used wallet, although there are a wide selection of wallets available that will allow you to connect and interact with DeFi.
Let’s use Metamask as an example:
- Download the Metamask extension. Do note that you will require a desktop with a browser which supports extensions (like Chrome or Brave).
- Create a new wallet. Once you have installed the extension, you will be asked to create a new wallet. All you need to do is click on the “Create a Wallet” option.
- Set a password. Once you have agreed to the terms and conditions, you will be asked to set a unique password. Remember, you will be unable to access your account using this password alone if you misplace your device and forget your private keys, it is required to secure your Metamask wallet on the browser of your choice.
- A seed phrase is allocated to you. You will be given a seed phrase made up of 12 random words. It is important that you note them down and store them safely, it is the only way to recover your account if there is an incident whereby your device is misplaced, amongst others.
Step 2 – Purchase relevant coins
You will now need to buy the relevant coin for the DeFi protocol that you plan to use. When it comes to DeFi, Ethereum is leading because of the value it provides through its smart contracts, this means that most DeFi protocols live on Ethereum, so you will likely need to buy ETH in order to use them.
You can acquire Ethereum on a cryptocurrency exchange like Binance or Coinbase. You can additionally buy crypto using fiat in a peer to peer exchange. Ensure that you sign up to legitimate websites as the cryptocurrency industry is rife with scams.
Step 3 – Explore DeFi
There are several ways to immerse yourself in the world of DeFi
- Lend out crypto. You could become a “yield farmer”, this involves earning governance tokens that are awarded for lending out your cryptocurrencies.
- Put your funds in a decentralised exchange, such as Uniswap. With DeFi exchange you can earn fees by becoming a market maker. Find out more about DeFi Exchange later in the article.
- Invest in DeFi projects like Aave or Yearn Finance, but please note that these assets are prone to volatility.
Always ensure to keep in mind that the crypto space is full of risks. Fraudsters, and scammers are prevalent, smart contracts have sometimes revealed how projects are not decentralised at all, with the token creators harnessing all the power.
DeFi Exchanges
Once you have acquired ETH or any compatible cryptocurrency, you can now explore the world of Decentralised Exchanges (DEXs). DEXs allow crypto investors to trade using liquidity solutions from order books to liquidity pools. A good place to start is with trusted protocols such as Uniswap. Uniswap is one of the most popular DeFi DEX platforms.
UniSwap, SushiSwap, and DODO
Uniswap is a leading decentralised crypto exchange that runs on the Ethereum blockchain. Uniswap allows anyone with an Ethereum wallet to exchange tokens without the involvement of any central party. Users of the Uniswap platform can swap any two Ethereum-built assets seamlessly, as well as an underlying liquidity pool; these liquidity pools ensure that Uniswap remains permissionless and trustless.
SushiSwap is a cryptocurrency exchange that allows you to swap different tokens/cryptocurrencies. This is an automated market-making (AMM) decentralised exchange. SushiSwap runs on the Ethereum Blockchain. SushiSwap is similar to Uniswap, however on Uniswap, the trading fee is 0.3%, whilst SushiSwap allocates the 0.3% differently, distributing 0.05% in the form of SUSHI tokens.
Much like the other exchange platforms, DODO is a liquidity protocol. The platform supplies on-chain liquidity in order to support the Proactive Market Maker algorithm (PMM) to provide everyone with pure and contract-fillable liquidity on the blockchain.
Curve, PancakeSwap, and BurgerSwap
Similar to Uniswap, Curve is a decentralised exchange that utilises a liquidity pool, the main difference however is that Curve is specially designed for stablecoin exchange, this allows for low slippage and low handling fees.
PancakeSwap is a decentralised exchange that is similar to Uniswap, however, it runs on Binance Smart Chain instead. The DEX allows you to swap tokens without an intermediary, as well as enabling you to earn liquidity pool and staking rewards, enter a lottery, and amongst others.
BurgerSwap is a DEX that also runs on the Binance Smart Chain (BSC). It allows you to swap between tokens issued on BSC, and earn rewards for providing liquidity to these decentralised markets. Furthermore, those that provide liquidity receive ‘Burger’ tokens which are a representation of their share of the pool.
SashimiSwap and dYdX
SashimiSwap is a new SushiSwap project. In the same fashion as other types of swriceap products, it adopts the AMM model. However, SashimiSwap does not share liquidity with SushiSwap despite their relationship. SashimiSwap allows anyone to participate in staking and mining.
dYdX is a decentralised margin trading platform based on Ethereum, it runs on smart contracts on the Ethereum blockchain, and allows users to trade with no intermediaries. dYdX allows users to borrow, lend and make bets on the future prices of popular cryptocurrencies, dYdX’s goal is to bring trading tools normally found in fiat markets to the world of blockchain.
The bottom line
This guide is a good place to start as you begin to fall down the DeFi rabbit hole. From here you can explore further, maybe dabble in yield farming opportunities. It should be remembered that these activities are not without significant risks. Extensive research should be carried out before interacting with DeFi applications due to the significant risks involved in DeFi. Hopefully, this guide has been useful in establishing a foundation that enables you to take advantage of the future of finance.
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.